Archive for the ‘DDTC’ Category

DDTC’s test versions for their new Registration and Advisory Opinion applications, which are housed on the cloud-based Defense Export Control and Compliance System (DECCS), are available for industry and testing and feedback. DDTC is encouraging testing and there will be additional applications for testing in the coming weeks. You must have a test account and a complete test registration in order to access any of the applications.

If you are interested in participating in the testing contact the DDTC Test Support Team below:

DDTC Test Support Team:

Email: PM-DDTC-DECCS@state.gov

Phone: (202) 663-1282 / (202) 663-2838

The DDTC Test Support Team will be available during the week from 10am to 4pm EST.

The Congressional Research Service (CRS) released “The U.S. Export Control System and the Export Control Reform Initiative” providing a full report on several aspects of the US export control system. The report provides background on policies and the possible future systems but with very few details (Congress will debate on whether the regulations should eventually have only one licensing agency).

In this article, Roland Stein of Blomstein discusses International Traffic in Arms Regulations (ITAR), a US regulatory framework intended to control the manufacturing, export and proliferation of arms, related goods, services and technologies.

Are European contracting authorities turning the tables on strict US arms control regulations? ITAR, short for “International Traffic in Arms Regulations”, is a US regulatory framework intended to control the manufacturing, export and proliferation of arms, related goods, services and technologies. Its primary aims are twofold: protecting the interests of U.S. national security and serving the objectives of U.S. foreign policy. ITAR is based on the Arms Export Control Act (AECA) (22 U. S. C. 2778-2780) and available in the Code of Federal Regulations under 22 CFR Parts 120-130. An ITAR-listing effectively permits U.S. authorities to control the export and whereabouts of regulated products. Generally, ITAR regulations do not only specify reporting obligations for contractors, but also contain strict restrictions on use, import, export and end-use of regulated products.

As an effective instrument of US state control, many market observers have long considered ITAR provisions to be a vital tool of US power projection abroad. However, an evolving opposing trend is becoming apparent: Fuelled by current shifts in the landscape of European defence procurement, ITAR restrictions are increasingly exploited as an instrument by European contracting authorities. While no state can afford to essentially “blacklist” US products or arms manufacturers altogether, European nations appear to leverage ITAR restrictions to favour European contractors over those with US involvement in specific cases.

At a time when there are indications that European defence spending is set to rise significantly in the near future due to a variety of initiatives for joint European procurement of military equipment such as the EU Permanent Structured Cooperation (PESCO) and the European Defence Fund, as well as established projects such and the Organisation for Joint Armament Co-operation (OCCAR), contractors with ties to the US will likely encounter legal and strategic challenges when attempting to obtain European defence contracts. The increasing use of ITAR-free restrictions will thus likely contribute to an already challenging market environment for non-European contractors.

Exclusion of products with ITAR restrictions

Lately, government agencies of various EU member states have attempted to exclude products with ITAR restrictions from defence procurements. A notable current case in which such a restriction was employed is the ongoing tender for around 120.000 new standard assault rifles for the German armed forces. The new design is supposed to succeed the current “G36” standard rifle produced by German manufacturer Heckler & Koch. The new rifle must meet a comprehensive catalogue of performance requirements and is intended for use in all branches of the armed forces. The contract for the acquisition of 120.000 firearms and “accessories in different quantities” has an estimated net value of approximately EUR 250 million. Its conclusion is scheduled for 2019, with a planned delivery of the rifles starting 2020. While the Europe-wide call for competition issued on 21 April 2017 did not specify any requirements in this respect, the subsequent invitation to tender by the German Ministry of Defence stipulated that any proposal for a successor rifle may not rely on components subject to ITAR regulations. In the case of the German rifle procurement, the ITAR-free exclusion criterion even applied to supplies and weapons produced entirely in Germany. A related tender regarding the manufacture and supply of a main battle sight and reflex visor for the new assault rifle includes a similar clause: according to the contract notice, both items may not be subject to the ITAR regulations.

According to press reports, SIG Sauer, a German-American bidding consortium, initially took part in the preceding competition with its existing MCX rifle. Besides SIG Sauer and the incumbent Heckler & Koch, the German Rheinmetall group participated in the competition in a joint venture with Austrian manufacturer Steyr Mannlicher. Whereas Heckler & Koch presented a newly developed rifle design, the HK433, Rheinmetall and Steyr Mannlicher proposed an existing design, the RS556 assault rifle. Surprising many observers, both SIG Sauer and Rheinmetall/Steyr Mannlicher eventually decided not to submit an offer before the close of the bidding period on 8 February. While the reasons for the eventual non-participation of Rheinmetall and Steyr Mannlicher remain unclear, SIG Sauer was very vocal about its decision to pull out of the procurement process, publically naming discriminatory design requirements as a motivation for its pull out of the competition. The company cited “blanket discrimination against U.S. products and bidders” and a disadvantageous wording of the invitation to tender as the main reasons for revoking its initial offer.

So far, the German Ministry of Defence has not specifically addressed the allegations, as it did not want to comment on the issue due to the ongoing tendering phase. SIG Sauer’s offer included a production based in Germany and a design lacking U.S. patent reservations. However, this was apparently insufficient to fully comply with tender requirements. The manufacturer’s proposal was still subject to ITAR restrictions, as SIG Sauer’s proposed design employed US technology, in particular the design of the magazine and several interfaces for accessories. According to SIG Sauer, an ITAR-free requirement was neither imposed in the earlier invitation to tender for an assault rifle for the German Army’s special forces, nor stipulated in the preceding call for competition. Therefore, contractors were not aware of any ITAR restrictions before participating in the preliminary competition.

SIG Sauer alleged that had it stayed in the competition, it would not have had a realistic chance of winning the tender, as the technical requirements were clearly and unambiguously tailored to the incumbent competitor Heckler & Koch. Furthermore, the company accuses the German Ministry of Defence of discriminating against U.S. bidders through excessive procurement requirements. The company criticises that the exclusion of ITAR controlled products constitutes a preliminary decision in favour of its EU-based competitors, as the criterion de facto renders most products by manufacturers with minor links to the U.S. ineligible.

Analysis

How does this case tie in with the current landscape of European defence procurement? Germany has previously exported up-to-date and used equipment to political and military allies if deemed appropriate and necessary, including assault rifles. For instance, the country has equipped Kurdish Peshmerga fighters in northern Iraq with approximately 16.000 assault rifles from 2014 onwards. ITAR restrictions might severely limit Germany’s ability to distribute weapons and equipment in such a way. Moreover, even the use of ITAR rifles by Germany’s own forces in countries such as Afghanistan might be complicated significantly by ITAR restrictions. Thus, political concerns may partly explain the exclusion of ITAR regulated offers in this case.

Still, this particular use of an ITAR-free clause is not an isolated case, but representative of a growing practice that is becoming more and more frequent in European procurement projects. ITAR-related exclusionary requirements signal a new trend, as the Ministry of Defence had in the past regularly accepted U.S. reservations and ITAR restrictions for various defence projects. As the delays resulting from U.S. approval and extensive disclosure requirements have been cause for criticism in the past, both timing and context of the depicted case suggest an inclination to ask for “ITAR-free” products in future procurements.

This practice is not just a German development, but indicative of a Europe-wide trend. ITAR-free clauses are becoming increasingly common as exclusion criteria in international invitations to tender. A corresponding widespread, albeit not concerted, effort to avoid the purchase of products subject to ITAR regulation is observable throughout the entire landscape of European defence procurement. For instance, large parts of the French arms industry tend to avoid using or sourcing ITAR-regulated items, provided an adequate substitute is available. Many manufacturers attempt to circumvent ITAR restrictions, as well. Products are regularly marketed as being “ITAR-free”. Notable French contractors and manufacturers such as Dassault Aviation avoid using key U.S. technologies altogether in order to strategically advertise and commercialise its fighter aircrafts as being exempt from ITAR restrictions.

The increased use of ITAR-free clauses in EU procurements is certainly not exclusively attributable to protectionist intentions. ITAR restrictions do in fact frequently tend to complicate and delay international procurements. In addition, the U.S. has shown a tendency to apply them strictly and strategically in the past. For instance, in 2014 a French contract for the sale of “Falcon Eye” reconnaissance satellites to the United Arab Emirates worth EUR 700 million was stalled for more than a year, as the satellites in question included ITAR-regulated electronic components. Even though these components were of no particular sensitivity, their inclusion still enabled the U.S. government to cause significant delays due to approval requirements.

Likewise, defence contractors may have a legitimate interest to protect confidential trade secrets, which they might be obliged to disclose under ITAR. ITAR-free clauses may thus in many cases reflect justified political and trade related concerns. The recent paradigm shift toward ITAR-free clauses may in part be explained by these and similar past negative experiences with ITAR-regulated items. However, the German depicted above case clearly demonstrates how ITAR-free clauses might be employed in the future to de facto exclude U.S. competitors and products from European procurements.

Outlook

While it is too soon to presume a concerted EU-wide effort to obstruct or even exclude U.S. defence contractors from EU government procurement procedures, two emerging trends are evident: On the one hand, systematic cooperation on procurement projects at the EU-level is increasing, accompanied by de jure benefits for EU-based companies. On the other hand, there has been a notable rise in national preferences of EU bidders through selective procurement requirements. These developments pose significant challenges for European and US contractors alike. It remains to be seen if this trend on the European defence sector continues and similar strategies are adopted towards other markets, in particular targeting dual use items. Legal challenges to such practices under European Procurement Law and International Trade Law are likely.

It should be added that the aforementioned developments do not appear to be temporary. The landscape of European defence procurement is adjusting rapidly, fuelled by significant recent geopolitical developments. On one hand, with the US shifting its strategic focus to other regions of the world and the UK set to leave the EU, continental European defence spending will presumably see a significant rise. Simultaneously, new mechanisms of EU defence procurement promise significant market changes. At a time when a variety of initiatives at the EU-level aim at promoting EU defence procurement, not least the recent introduction of a Permanent, Structured Cooperation (PESCO) in defence matters, the future effects of ITAR-free procurement on international trade and competition will need to be monitored closely.

The Department of State has removed some notification requirements from the International Traffic in Arms Regulations (ITAR) and has revised several entries on the Unites States Munitions List (USML). The goal was to remove items that do not warrant continued inclusion. The rule also adds notes to USML Categories IV and V, revises control text in USML Categories VIII, XI, and IV. This rule was effective October 4, 2018 but interested parties can submit comments by November 19, 2018 by:

Internet: At www.regulations.gov,search for this notice using Docket DOS–2018–0020.

Changes:

PART 121—THE UNITED STATES MUNITIONS LIST

Section 121.1 is amended as follows:

In Category IV, redesignate Note to Paragraph (d) as Note 1 to Paragraph (d) and add Note 2 to paragraph (d): This paragraph does not control thrusters for spacecraft.

In Category V, add Note 3 to USML Category V: Items controlled in this Category, except for materials described in paragraph (c)(6), (h), or (i), are licensed by the Department of Commerce when incorporated into an item subject to the EAR and classified under ECCN 1C608.

In Category VIII, revise paragraph (h)(12): Unmanned aerial vehicle (UAV) flight control systems and vehicle management systems with swarming capability (i.e. UAVs that operate autonomously (without human input) to interact with each other to avoid collisions, fly in formations, and are capable of adapting in real-time to changes in operational/threat environment, or, if weaponized, coordinate targeting) (MT if for an aircraft, excluding manned aircraft, or missile that has a ‘‘range’’ equal to or greater than 300 km)

Note to Paragraph (a)(3)(i): This paragraph does not control radars that: (1) Are incapable of free space detection of 1 square meter Radar Cross Section (RCS) target beyond 8 nautical miles (nmi); (2) contain a radar update rate of not more than 1Hz; and (3) employ a design determined to be subject to the EAR via a commodity jurisdiction determination (see § 120.4 of this subchapter).

Note to Paragraph (a)(3)(xii): This paragraph does not control radars not otherwise controlled in this subchapter, operating with a peak transmit power less than or equal to 550 watts, and employing a design determined to be subject to the EAR via a commodity jurisdiction determination (see § 120.4 of this subchapter).

(ii) A fractional bandwidth of 5% or greater for any channel; (iii) Any planar side with length d (in cm) equal to or less than 15 divided by the lowest operating frequency in GHz [d ≤ 15cm * GHz/fGHz]; and

(iv) At least one electronically variable phase shifter per channel.

Note 1 to Paragraph (c)(4): A MMIC: (a) Is formed by means of diffusion processes, implantation processes, or deposition processes in or on a single semiconducting piece of material; (b) can be considered as indivisibly associated; (c) performs the function(s) of a circuit; and (d) operates at microwave frequencies (i.e., 300 MHz to 300 GHz).

Note 2 to Paragraph (c)(4): A transmit/ receive module is a multifunction electronic assembly that provides bi-directional amplitude and phase control for transmission and reception of signals.

Note 3 to Paragraph (c)(4): A transmit module is an electronic assembly that provides amplitude and phase control for transmission of signals.

Note 4 to Paragraph (c)(4): A transmit/ receive MMIC is a multifunction MMIC that provides bi-directional amplitude and phase control for transmission and reception of signals.

Note 5 to Paragraph (c)(4): A transmit MMIC is a MMIC that provides amplitude and phase control for transmission of signals.

Note 6 to Paragraph (c)(4): USML Category XI(c)(4) applies to transmit/receive modules and to transmit modules, with or without a heat sink. The value of length d in USML Category XI(c)(4)(iii) does not include any portion of the transmit/receive module or transmit module that functions as a heat sink.

Note 7 to Paragraph (c)(4): Transmit/ receive modules, transmit modules, transmit/ receive MMICs, and transmit MMICs may or may not have N integrated radiating antenna elements, where N is the number of transmit or transmit/receive channels.

Note 8 to Paragraph (c)(4): Fractional bandwidth is the bandwidth over which output power remains constant within 3 dB (without the adjustment of other operating parameters), divided by the center frequency, and multiplied by 100. Fractional bandwidth is expressed as a percentage.

In Category XV, revise the second and third sentences of paragraph (f).

(f) * * * Defense services include the furnishing of assistance (including training) to a foreign person in the integration of a satellite or spacecraft to a launch vehicle, including both planning and onsite support, regardless of the jurisdiction, ownership, or origin of the satellite or spacecraft, or whether technical data is used. It also includes the furnishing of assistance (including training) to a foreign person in the launch failure analysis of a satellite or spacecraft, regardless of the jurisdiction, ownership, or origin of the satellite of spacecraft, or whether technical data is used.

PART 123—LICENSES FOR THE EXPORT AND TEMPORARY IMPORT OF DEFENSE ARTICLES

Section 123.22 is amended by revising paragraphs (b)(3)(i) and (c)(2) to read as follows:

123.22 Filing, retention, and return of export licenses and filing of export information. * * * * * (b) * * * (3) * * *
(i) Technical data license. Prior to the permanent export of technical data licensed using a Form DSP–5, the applicant shall electronically provide export information using the system for direct electronic reporting to DDTC of export information and self-validate the original of the license. Exports of copies of the licensed technical data should be made in accordance with existing exemptions in this subchapter. Should an exemption not apply, the applicant may request a new license.
* * * * *
(c) * * *
(2) Licenses issued by DDTC but not decremented by U.S. Customs and Border Protection through its electronic system(s) (e.g., oral or visual technical data releases) must be maintained by the applicant in accordance with § 122.5 of this subchapter.

Ferdi Murat Gul (Fred Gul), 42, of Turkey has been indicted by a grand jury on the following counts:

One count of conspiracy to commit wire fraud

Six counts of wire fraud

One count of conspiracy to violate the Arms Export Control Act (AECA)

Once substantive count of violating the Arms Export Control Act

Gul is the principal owner, chief executive office, and general manager of Bright Machinery Manufacturing Group Inc. (BMM), a defense contracting company in New Jersey and FMG Machinery Group (FMG), a purported manufacturing company in New York. He also has an ownership interest in HFMG Insaat (HFMG), a manufacturing company located in Turkey.

Between October 2010 and June 2015 Gul would submit bids for DoD contracts for BMM, he would submit quotes based on BMM providing military goods manufactured in the US. BMM actually relied on Gul’s Turkish company, HFMG for the goods. Over the course of 5 years BMM was awarded approximately $7 million in DoD contracts. BMM fraudulently won 346 contracts to manufacture torpedoes for the US Navy, bomb ejector racks, and armament utilized in US Air Force aircraft, and firearms and mine clearance systems used by US military abroad. Later testing by the DoD exposed the some parts had several design flaws and were unusable.

Gul and his conspirators hid the fraudulent activity from the government by submitting forged certifications and fabricated information by email to DoD. They also falsely claimed that they performed quality control on the procedures and parts sold to DoD. To have HFMG create the parts for BMM, Gul exported drawings and technical data to Turkey. Some of this information was subject to the International Traffic in Arms Regulations (ITAR) and required a license form the State Department.

The wire fraud counts carry a maximum penalty of 20 years in prison and a fine of $250,000. The Arms Export Control Act violations carry a maximum penalty of 20 years in prison and a $1 million fine.

Ferdi Murat Gul is currently at large and believed to be in Turkey. Also remember…The charges and allegations of this indictment are merely accusations, and the defendant is considered innocent until proven guilty (cue sound from Law & Order).

The U.S. State Department recently announced its plan to put into effect the Conventional Arms Transfer policy, which adds economic security as a factor when the government considers whether to approve arms exports.

The goal of the plan is to boost American weapons exports. Council President Keith Webster, President Obama’s last director of international cooperation at the Pentagon, called the policy “a major first step toward improving government decision processes and policies.” Aerospace and defense firms rely on innovation and U.S. government support to compete on a global scale, he added.

The export council offered around 30 recommendations on how to hardwire economic security and defense-industrial base considerations into the government’s international arms sale decisions.

Despite the positive feedback, there have been concerns from arms control advocates who say the policy could fuel conflicts around the world and aid regimes that do not respect human rights.

“If the administration is serious about claims that these changes make for responsible policy, it should add much greater transparency into the arms transfer and monitoring process,” Forum on the Arms Trade’s founder and coordinator, Jeff Abramson, wrote.

Leading the world in arms transfers, the U.S. is expected to reach $47 billion government-to-government sales this year, whereas $42 billion sales were approved by the State Department for all of 2017.

Lt. Gen. Charles Hooper, head of the Defense Security Cooperation Agency, said during the Farnborough International Airshow on July 18, “Defense exports are good for our national security, they’re good for our foreign policy. And they’re good for our economic security. And as the administration and our leadership has said, economic security is national security.”

According to a State Department press release released today, the United States has made a determination that Russia used novichok, a chemical warfare agent, in an attack on British soil and, as a result, the US will impose sanctions on Russia under the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991 (the “CBWC Act”), 22 U.S.C. § 5601 et seq. The text of these sanctions was not released. Instead, the text will be in a Federal Register notice expected to be published on or around August 22. The sanctions will be effective as of the date of the publication of that notice.

Because these sanctions are being imposed under the CBWC Act, we can already get a good idea of what these sanctions will be. The Act contemplates sanctions being imposed in two stages. The first stage, described in section 5605(a), sets forth the following sanctions, all of which are required to be imposed upon the offending country:

Termination of all foreign assistance

Termination of all arms sales

Termination of all foreign military financing

Denial of U.S. government credit or assistance

Termination of all exports of items controlled on the Commerce Control List for NS reasons

To be honest, none of these sanctions will have any significant impact on Russia. Arms sales to Russia have been prohibited for some time now. The country chart already has Russia controlled for both columns of NS controls. Of course, you could say that the new sanctions will mean that NS items will not be considered for licenses under any circumstances. But I don’t think licenses to export NS items to Russia are being readily granted now.

The second stage, if it happens, would take place on November 8 of this year unless the President determines that Russia is no longer using chemical or biological weapons. If that determination is not made, the President is required to impose three sanctions from a set of six possible sanctions. Those six possible sanctions are:

Opposing multilateral bank financial assistance to Russia

Prohibition of U.S. bank loans to the government of Russia

Prohibition of all exports of all U.S. goods and technology to Russia

Downgrading or suspending diplomatic relations with Russia

Termination of all service to and from the United States by Russian airlines

Whether the President will make the findings necessary to impose this second stage and which three of the six will be imposed is anyone’s guess, although I suspect that most people likely have a pretty good guess. The upcoming Federal Register notice will probably not even address the second stage sanctions. If the United States does in fact impose the three second stage sanctions, the best guess is probably that he will impose the least restrictive of those, i.e., opposing multilateral bank loans, prohibiting U.S. bank loans, and expelling a few more diplomats.

On May 24, 2018 the State and Commerce Departments issued proposed regulations regarding the transfer of export jurisdiction for commercial firearms and ammunition from the International Traffic In Arms Regulations (“ITAR”) to the Export Administration Regulations (“EAR”).[1] Specifically, the proposals would amend Categories I, II and III of the U.S. Munitions List (“USML”) to remove certain commercial firearms products, ammunition, and certain parts, components, accessories and attachments and transfer these items to the Commerce Control List (“CCL”) under the EAR. This is the first step in the long-awaited process under export control reform to transfer firearms products that no longer warrant control as military products from ITAR to the less restrictive EAR. This is welcome news to our clients and many in the firearms and firearms accessory market. The following is a summary of a number of the proposed changes and the impact on companies dealing in these products.

At the outset, it should be recognized that these are proposed amendments – they are not the final versions of the regulations. State and Commerce have provided these in proposed form and are requesting comments from interested parties during a 45-day comment period. Upon the receipt of comments, the agencies may make further modifications to the proposals and must still issue final regulations. Consequently, companies should be alert to any additional changes and not act on the proposed regulations until they become final. Nevertheless, companies can become engaged in the process now by submitting comments with recommendations for further revisions and begin planning for the transition to the new regulatory program. Many industry groups and advocacy organizations are encouraging their members to offer comments in support of the proposed regulations.

Amendments Under ITAR. Under the proposed State Department rule, USML Category I, covering firearms and related articles, will be amended to remove non-automatic and semi-automatic firearms up to caliber .50 (12.7 mm) inclusive and certain parts, components, accessories and attachments “specially designed” for such articles. The goal of such amendments is to remove common items like modern sporting rifles while continuing to control under ITAR “only defense articles that are inherently military or that are not otherwise widely available for commercial sale.”[2] Such products would be transferred to be controlled under the EAR (discussed further below). Certain products, however, would continue to remain on USML Category I and subject to ITAR that fit within the above parameters, including the following:

High capacity (greater than 50 rounds) magazines, and parts and components to convert a semi-automatic firearm into a fully automatic firearm; and

Accessories and attachments specially designed to automatically stabilize aim (other than gun rests) or for automatic targeting.

Category II, covering guns and armaments, would be amended to specifically list the items subject to controls and to establish a “bright line” between the USML and the CCL for the control of these items. Items removed and transferred to the CCL include engines for self-propelled guns and howitzers,[3] tooling and equipment for the production of articles controlled in USML Category II[4] and certain test and evaluation equipment.[5] Items specifically remaining on the USML and subject to ITAR would include certain apparatus and devices for launching or delivering ordnance,[6] certain autoloading systems currently controlled under USML Category II paragraph (i), developmental guns and armaments funded by the Department of Defense[7] and specially designed parts and components of such developmental products.

Category III, covering ammunition and ordinance, would be amended to be consistent with Category I, including the removal of ammunition for small arms that were transferred out of Category I. Category III would also be amended to remove the broad “catch-alls” previously covered and to specifically enumerate the remaining items to be controlled.

New Controls Under the EAR. Items removed from the USML as described above would be transferred to be controlled under the EAR which is administered by the Bureau of Industry and Security (“BIS”) within the Commerce Department. As part of this transfer, BIS has established 17 new export control classification numbers (“ECCN’s”) on the CCL to control items that were removed from the USML.

Items covered by these ECCN’s will continue to be subject to significant export restrictions. For example, these items will require export licenses for exports, reexports and in-country transfers. In addition, certain “technology” related to the transferred firearms, ammunition and related products will be controlled on the CCL – in many cases licenses will be required for the transfer of controlled technology out of the U.S. and the transfer or disclosure of controlled technology to foreign persons in the U.S. Certain license exceptions would also be available for the transferred items (although the license exceptions under the EAR frequently differ from the license exemptions under ITAR). As with ITAR licenses issued by DDTC, items exported under a license would only be authorized for the end user and end use specified on the license – any reexports or in-country transfers of such items beyond such authority will require specific additional license authorization from BIS.

Continued ITAR Controls On Brokering of Commercial Firearms. Notwithstanding the changes described above, commercial firearms and ammunition would continue to be covered under the ITAR brokering requirements. Specifically, the State Department proposed rule states that products listed on the U.S. Munitions Import List (used by the Bureau of Alcohol, Tobacco, Firearms and Explosives for administering controls on the permanent import of firearms products) will continue to be subject to the ITAR brokering requirements set forth in 22 CFR Part 129. Category I(a) of the USMIL includes nonautomatic and semiautomatic firearms, to caliber .50 inclusive, and USMIL Category III(a) includes ammunition for such products. Thus, despite the broad changes to USML Categories I and III under the proposed amendments, parties will still be subject to ITAR regulation for brokering and “facilitation” in the sale of commercial firearms products, including requirements for registration, obtaining advanced authorizations for certain transactions, reporting, recordkeeping and restrictions on brokering transactions involving the “proscribed” countries identified in 22 CFR §126.1.

Impact On Firearms Companies. The proposed changes will most likely affect many companies in the firearms industry in a number of ways including:

Export Classifications. Companies will review the export jurisdiction and classification of their products to determine if they have been transferred to BIS jurisdiction and, if so, to determine the correct ECCN’s for their products. This will apply to firearms, ammunition, parts, components, accessories and attachments.

Licenses For Products, Technology and Software. As referenced above, companies will still be required to obtain export licenses for exports, reexports and in-country transfers for controlled products, technologies and software. However, in many cases these will be from a different licensing agency under different licensing procedures. Consequently, many companies will be amending their export compliance procedures to conform to these new requirements.

Registration. There is no requirement for companies to register under the EAR, as exists under ITAR. Of course, if companies still engage in activities regulated under ITAR (such as brokering commercial firearms products or the sale of items remaining in USML Categories I, II and III), they will be required to maintain their DDTC registration.

Defense Services. There are reduced controls on performing services under the EAR as compared with those under ITAR.[8]

Temporary Imports. The EAR does not contain controls on the temporary import of items subject to the EAR as required under ITAR.

Reports for Payments of Fees, Commissionsand Political Contributions. The EAR does not require exporters to file reports on the payment of political contributions, fees and commissions as under ITAR Part 130.

Items Still Regulated Under ITAR. For items that remain listed on the USML after the amendments, such items will still be subject to ITAR and the requirements thereunder.

Status of Amendments. As stated above, the amendments described in this alert are proposed changes only and not final amendments. Parties have until July 9, 2018 to submit comments to State and Commerce on the proposed regulations. Companies are encouraged to review the proposals carefully to assess how they will apply to their businesses as there is still opportunity to propose further amendments. Officials at DDTC and BIS typically review the comments carefully and often adopt changes recommended by commenters.

While the transfer of commercial firearms products from ITAR to EAR controls is not yet concluded, the process has begun. This is the time for companies to become engaged – in reviewing, commenting on and planning ahead for these changes.

[1] The proposed State Department rule is available here, and the proposed Commerce Department rule is available here.

[8] The performance of services is addressed in the EAR in 15 CFR §744.6(a)(1)(ii) and §744.6(a)(2). In addition, the BIS proposed rule states as follows regarding defense services: “The EAR does not include a concept of “defense services,” and the “technology” related controls are more narrowly focused and apply in limited contexts as compared to the ITAR.” See BIS proposed rule at p. 24,167.

On May 24, 2018, the U.S. Departments of State and Commerce officially published proposed rules to transition most firearms and ammunition away from the export controls of the Department of State’s International Traffic in Arms Regulations (ITAR) over to the controls of the Department of Commerce’s Export Administration Regulations (EAR). In this alert, the second of four installments, we will examine the proposed revisions to the ITAR control list, the U.S. Munitions List (USML) Category I, and the Department of Commerce’s proposed companion rule amending the Commerce Control List (CCL).

Both the State and Commerce Departments are seeking written comments on the proposed rules, which will be accepted until July 9, 2018. We strongly encourage industry to take time to carefully review the revised categories and provide actionable commentary to the proposed rules. This is a critical opportunity for industry to provide comments that would assist the government in reducing jurisdictional ambiguities and clarifying the articles that will remain subject to the ITAR. The specific instructions for submitting comments are included in each proposed rule.

Proposed Transitions from USML Cat. I to CCL

Title for this category will change from “Firearms, Close Assault Weapons and Combat Shotguns” to “Firearms and Related Articles.”

Articles Removed from USML Cat. I – State’s rule proposes to transition away from the USML non-automatic and semi-automatic firearms up to and including .50 caliber currently controlled under paragraph (a), as well as all parts, components, accessories and attachments specially designed for those firearms. These items will be subject to the EAR under newly created “500 series” Export Control Classification Numbers (ECCNs).

Commerce originally created the “500 series” as part of “Export Control Reform” under the Obama Administration to control items that had been from the USML or certain items on the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual Use Goods and Technologies Munitions List (the “Wassenaar List” or WAML). Compared to the “600 series” ECCNs, which control items of a military nature removed from the USML, the “500 series” contain items not appropriate for the 600 series control because they have predominant civil, recreational, law enforcement, or other non-military applications.

To capture the firearms and ammunition in USML Cats. I-III that will transition to the CCL, Commerce proposes in its companion rule to create a total of 17 new ECCNs. For the firearms, parts, components, accessories and attachments that will transition from USML Cat. I, the proposed new ECCNs are:

– 0A501 (Firearms and related commodities)

– 0A502 (Shotguns and certain related commodities)

– 0A504 (Optical sighting devices and certain related commodities)

– 0E501 (Technology for firearms and certain related items)

– 0E502 (Technology for shotguns)

– 0E504 (Technology for certain optical sighting devices)

Articles Still Controlled Under USML Cat. I – items that would remain under Category I are positively listed as follows, including the corresponding paragraph (Significant Military Equipment (SME) is designated with an asterisk (*)):

(g) Barrels, receivers (frames), bolts, bolt carriers, slides, or sears specially designed [emphasis added] for the articles in paragraphs (a), (b), and (d) of this category.

(h) Parts, components, accessories, and attachments, as follows:

(1) Drum and other magazines for firearms to .50 caliber (12.7 mm) inclusive with a capacity greater than 50 rounds, regardless of jurisdiction of the firearm, and specially designed [emphasis added] parts and components therefor;

(2) Parts and components specially designed for conversion of a semiautomatic firearm to a fully automatic firearm[emphasis added].

(3) Accessories or attachments specially designed to automatically stabilize aim (other than gun rests) or for automatic targeting, and specially designed parts and components therefor [emphasis added].

Technical Data and Defense Services – paragraph (i) specifies “technical data,” as defined in ITAR §120.10, and “defense services,” as defined in ITAR §120.9, directly related to the defense articles described in paragraphs (a), (b), (d), (e), (g), and (h) of Cat. I, and classified technical data directly related to items controlled in ECCNs 0A501, 0B501, 0D501, and 0E501 and defense services using the classified technical data. Exemptions will continue to be covered in ITAR §125.4.

Revised USML Cat. I will also include several notes to explain what items are excluded by the category (non-automatic and semi-automatic firearms up to and including .50 caliber; non-automatic shotguns; BB, pellet, and muzzle loading (e.g., black powder) firearms; and parts, components, accessories, and attachments of firearms and shotguns in paragraphs (a), (b), (d), and (g) of Cat. I that are common to non-automatic firearms and shotguns) and what is meant by firearm, fully automatic firearm or shotgun, or caseless ammunition.

The proposed rule also adds a new paragraph (x) to Cats. I, II and III to allow for ITAR licensing of commodities, software and technology subject to the EAR, which paragraph has already been added to all of the other USML categories that have gone through the rewrite process. It is important to note that paragraph (x) is only available if those items EAR items are to be used in or with defense articles controlled in USML Cat. I, and the items are described in the purchase documentation submitted with the ITAR license application. Further, it is important to understand that such EAR items, even if included on an ITAR export license under USML Cat. I(x), would remain subject to the controls of the EAR, despite the appearance of the ITAR license. Use of paragraph(x) is a licensing convenience only; it does not change the jurisdictional status of an item. Consequently, it will be incumbent on the U.S. exporter to properly educate its customers on the proper licensing authority, especially for reexport and retransfer requests.

CCL Controls

A key fact in the proposed rules is that the transition from USML to CCL will NOT result in a decontrol of firearms or ammunition. Firearms transitioning from the USML to CCL will be subject to controls under National Security (NS), Regional Stability (RS), Crime Control and Detection (CC), Firearms Convention (FC), United Nations Sanctions (UN) and Anti-Terrorism (AT). Indeed, the proposed rules make it abundantly clear that BIS will require licenses to export or reexport to ANY country firearms or other weapons that transitions from the USML to the CCL.

License exceptions, such as limited value shipments (LVS), government (GOV), baggage (BAG) and strategic trade authorization (STA) will be very limited for small arms formerly on the USML, so industry should carefully review the ECCNs in the proposed rule to see what license exceptions are available for each ECCN and the limitations.

Each new ECCN will be made up of technically specific subparagraphs in an enumerated “List of Items Controlled.” For example, the list of items controlled under ECCN 0A501 is comprised of paragraphs .a – .w, which identify the items classified under the particular paragraph. The ECCN also includes .x and .y paragraphs for parts and components. The .x paragraph operates like a catch-all, as it lists specially designed parts and components that are not controlled elsewhere. Conversely, the .y paragraph lists only those parts, components, accessories, and attachments that are controlled only for UN and AT reasons. Such items may be exported to nearly all destinations without a license. The parts and components captured by the .x paragraph, on the other hand, are subject to NS, RS, FC, UN, and AT and will likely require a license for most destinations.

It will be incumbent on the exporter (or temporary importer) to review every firearm and firearm part, component, accessory, and attachment in which it deals so as to determine the new classification once the rules become final. The specific license requirements, and the applicability of license exceptions, as well as any end-use or end-user restrictions, will depend on the specific subparagraph classification of the governing ECCN.

Specially Designed

A critical concept in the proposed revisions to the control lists is the term “Specially Designed.” This term has been reviewed, criticized, discussed, and analyzed in depth since it was first incorporated into the ITAR and the EAR in the initial implementation rules for Export Control Reform, which DDTC and BIS published in the Federal Register on April 16, 2013.

This term is NOT up for public comment at the present time, but to understand the proposed revisions to the USML and CCL control lists for firearms and ammunition, it is imperative to comprehend the term. Both the ITAR and EAR use the term, “Specially Designed” to remove the catch-all controls currently present in the USML Cats. I-III and to designate what parts, components, accessories and attachments are subject to either the ITAR or the EAR. We have highlighted the proposed use of “specially designed” in USML Cat. I in the list above.

It is important to note that the “specially designed” analysis is not applicable to the entire USML Category, as it can be used only if it is specified within a particular paragraph. As the revisions to Cat. I are intended to make the list a positive list and include only those articles that warrant control under the ITAR for the reasons stated previously, there should be a bright line between those articles subject to the ITAR and those subject to the EAR. Industry therefore must carefully review the full definition of “Specially Designed” and the application to the proposed revisions of Cat. I and provide comments that would assist the government in reducing jurisdictional ambiguities and clarifying the articles subject to the ITAR.

Industry should also review the ITAR order of review outlined in 22 C.F.R. § 121.1(b)), and the Order of Review Decision Tool available on DDTC’s website. BIS also provides an Order of Review Decision Tool on its website.

Industry should be forewarned not to underestimate the time intensive process of classifying the parts, components, attachments and accessories for firearms under the proposed rules. A critical component is the specially designed analysis, which itself is complex and difficult to understand immediately. It would be foolish to skip over classification, as license requirements, applicability of license exceptions, and restrictions are dependent on the classification, down to the specific ECCN paragraph. Further, export license applications will require identification of the specific subparagraph of control as well. The days of simply identifying “paragraph (h)” for any and all parts and components are quickly coming to an end.

Brokering

In addition to the proposed revisions to the USML Cats. I-III, DDTC’s proposed rule identifies several “conforming changes” in other parts of the ITAR to remove references to firearms that will be controlled on the CCL. One such revision is to section 129.1 to clarify that regulations on brokering activities apply to defense articles and defense services designated on the USML as well as items described on the U.S. Munitions Import List (USMIL) for permanent import controls. The USMIL is promulgated by the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) pursuant to the permanent import provisions of the Arms Export Control Act. ATF’s regulations are in 27 C.F.R. Pt. 447, and the USMIL is in 27 C.F.R. § 447.21.

According to DDTC, “the items that will move to the CCL for export control purposes, yet are on the USMIL for permanent import purposes, remain subject to the brokering requirements of [ITAR] part 129 with respect to all brokering activities, including facilitation in their manufacture, export, permanent import, transfer, reexport, or retransfer.” 83 Fed. Reg. at 24199 (May 24, 2018). Approaching this from the catch and release analysis that has permeated export control reform, this is the “catch.” The proposed revision in section 129.2, however, adds the following release in a new paragraph (vii) for activities that are NOT considered brokering activities:

“Activities by persons to facilitate the export, reexport, or transfer of an item subject to the EAR that has been approved pursuant to a license or license exception under the EAR or a license or other approval under this subchapter.”

As written, this language is very broad because the clause “that has been approved” does not limit past approvals to the person engaging in the subject activities. Further, the past approvals may be from either an EAR or an ITAR authorization.

Electronic Export Information Filings to Automated Export System

A critical change in the proposed rules lies within the Department of Commerce proposed rule relating to the Electronic Export Information (EEI) filings to Automated Export System (AES). According to the proposed rule, AES filings would be required for exports of all firearms transitioned to the CCL from the USML, regardless of value or destination. This requirement would also extend to temporary exports under license exceptions TMP or BAG.

In addition, the rule proposes to expand the required data elements of AES filings to include serial numbers, make, model, and caliber for such firearms. Industry should carefully evaluate the impact this requirement will have on operations and include in comments to the proposed rules.

Temporary Imports

The proposed Commerce rules set out a new process in 15 C.F.R. 758.10 for temporary imports of items subject to both the EAR and the USMIL. The process would impose entry clearance requirements for firearms temporarily imported into the United States for a period not to exceed 1 year, and then would require the use of the TMP license exception for the return export.

For the inbound transaction, U.S. Customs and Border Protection would be charged with collecting identifying information necessary to track the items temporarily imported, such as the list of firearms with serial numbers, model, make, quantity, and value, as well as other import and supporting documents. For the export, a license would not be required, but CBP would match the export to the information received upon entry. Firearms may not be imported from or ultimately destined to certain proscribed or restricted countries, and the proposed rule includes language that would instruct importers to contact CBP at the port of import or export for the proper procedures to provide any data or documentation required by BIS. Commerce is seeking comment from industry on this proposed new process.

This brings to a close this second installment of our four-part series on the proposed rules transitioning firearms and ammunition from the USML to the CCL. In our next two alerts we will examine the proposed revisions to USML Cats. II and III and the new EAR controls.

On May 14, 2018, the U.S. Department of State posted on its website proposed rules to transition most firearms and ammunition off the International Traffic in Arms Regulations (ITAR) control list, known as the U.S. Munitions List (USML), over to the U.S. Department of Commerce’s export control list, known as the Commerce Control List (CCL). The reason for the change is to revise the scope of the ITAR to control only those articles that provide the United States with a critical military or intelligence advantage or, in the case of weapons, are inherently for military end use. Such items will remain on the USML, while items no longer warranting control under the ITAR will be transitioned to the CCL and be subject to the licensing provisions of the Export Administration Act (EAR), administered and enforced by the U.S. Department of Commerce, Bureau of Industry and Security (BIS).

In anticipation of the official publication of the proposed rules, scheduled for May 24, 2018, we thought it advisable to offer an overview of the EAR. Once the rules publish on May 24, we will circulate an in-depth 3-part review of the proposed amendments to the ITAR and to the EAR and the potential impacts on industry.

The following overview of the EAR is intentionally broad, and is intended to serve only as a backdrop to the proposed rules to transition most firearms and ammunition, along with certain parts, components, attachments and accessories, from ITAR controls to EAR controls.

Scope of Controls – Subject to the EAR

Items – the Commerce Control List

While the Department of State controls over exports, reexports, and temporary imports are confined to “defense articles” and “defense services” listed on the USML, the Department of Commerce controls over exports and reexports are much broader. The EAR, found in 15 C.F.R. Pts. 730-780, control the export and reexport of “items” (commodities, software, and technology, each term separately defined in the EAR) and certain activities that are NOT exclusively controlled for export or reexport by another agency of the U.S. government which regulates exports or reexports for national security or foreign policy purposes, such as the U.S. Department of State.

Items subject to the EAR consist of the items listed on the CCL in Part 774 of the EAR, and all other items that meet the definition of “subject to the EAR” in section 734.3. The CCL is made up of ten Categories that are further broken into Export Control Classification Numbers (ECCNs). An ECCN is an alpha-numeric code that describes an item or types of items and shows the controls on that item and available license exceptions. The ECCN is not a Harmonized Tariff Schedule (HTS) number, and is not a Schedule B number. To determine whether an item requires an export license from BIS, the exporter must know how the item is classified on the CCL.

As noted above, the CCL is divided into 10 categories, with each category subdivided into five groups, designated by the letters A through E as follows: (A) Equipment, assemblies and components; (B) Test, inspection and production equipment; (C) Materials; (D) Software; and (E) Technology. Within each group is where you will find the ECCNs that enumerate the items that are controlled on the CCL. The firearms and ammunition currently classified on the USML in Categories I, II and III that have been selected to transition to the EAR will be enumerated in new ECCNs created under Category 0 (nuclear materials, facilities and equipment, and miscellaneous items) and product groups A, B, D and E. We will review the proposed rules and the new ECCNs in detail in our forthcoming alerts.

Items subject to the EAR which are not listed on the CCL are generally designated as “EAR99.” Often, items classified as EAR99 do not require an export license, but EAR99 is a classification, not a license exemption! Further, EAR99 does not automatically mean that no license is required. If the export violates any of the general prohibitions listed in EAR section 736.2, such as prohibited end-user, end-use, or sanctioned or embargoed country, a license is required.

The above discussion relates only to the question of what is subject to the EAR. Being subject to the EAR does not automatically mean a license is required for an export or reexport. This is a separate analysis that we will examine below.

Parts and Components – De Minimis

Foreign-made commodities that incorporate controlled U.S.-origin commodities may also be subject to the EAR if they have de minimis level of U.S. content. What constitutes the de minimis level depends on the commodity and the destination country for the reexport, and may range from no de minimis levels (for items subject to higher controls), to 10% or 25% de minimis. The rules for calculating de minimis levels are found in section 734.4 of the EAR.

Technology

The EAR defines “technology” as “information necessary for the “development,” “production,” “use,” operation, installation, maintenance, repair, overhaul, or refurbishing (or other terms specified in ECCNs on the CCL that control “technology”) of an item. Each of the quoted terms are defined in Part 772 of the EAR.

EAR controls over “technology” are more narrowly focused than the ITAR controls over technical data, and apply in limited contexts. To determine whether the technology for an ECCN is also enumerated on the CCL, the corresponding “E” ECCN for the platform should be reviewed. For example, in the proposed rules for firearms currently in USML CAt. I, there will be a new ECCN 0E501 that controls technology for firearms and certain related items. However, the technology controlled would be that which is required for the “development” and “production” of firearms other than shotguns. This new ECCN also would apply the anti-terrorism and United Nations reasons for control (see below) to “technology” “required” for the operation, installation, maintenance, repair, or overhaul of such firearms. As the proposed Commerce rule explains, “controlling this “technology” under the EAR rather than the ITAR is appropriate because the “technology” for the “development,” “production,” operation, installation, maintenance, repair, and overhaul of the firearms to be described in 0A501 is widely available throughout the world and its possession does not confer a significant military or intelligence advantage on the United States.”

It is important to point out that the EAR’s carve-out from controls for published works or information in the public domain is much broader in scope compared to the ITAR carve-out for public domain. In section 734.7, “published” technology or software is carved out from EAR controls “when it has been made available to the public without restrictions upon its further dissemination….” For example, subscriptions available without restriction, libraries or other public collections open to the public and from which the public can obtain tangible or intangible documents, unlimited distributions at a conference, seminar, trade, show, or exhibition generally accessible to the public, public/unlimited distribution in any form, including posting on the Internet on sites available to the public. Many may rejoice over this, as the ITAR still does not recognize the Internet as being in the “public domain.”

As further illustration of technology not controlled under the EAR, the BIS proposed rule cites the example of a gun manufacturer posting a firearm’s operation and maintenance manual on the Internet, making it publicly available to anyone interested in accessing it and without restrictions on further dissemination. According to the proposed rule explanation, such operation and maintenance information included in that published manual would no longer be “subject to the EAR.” Nonproprietary system descriptions, including for firearms and related items, are another example of information that would not be subject to the EAR.

Reasons for Control

The reasons for control for exports under the EAR include the following:

– CB (Chemical & Biological Weapons)

– NP (Nuclear Proliferation)

– NS (National Security)

– MT (Missile Technology)

– RS (Regional Stability)

– CC (Crime Control)

– AT (Anti-Terrorism)

– UN (United Nations)

– EI (Encryption Item)

– CW (Chemical Weapons Convention)

The specific reasons for control for a particular item is identified within each specific ECCN. Unlike the blanket ITAR requirement for a license to anywhere in the world, BIS license requirements are unique to each individual ECCN. Whether a license is required for a particular export will depend on the destination country.

Licensing Under the EAR

Each ECCN is made up of four sections: a heading(description of the items controlled), the license requirements(including all possible reasons for control, such as AT, UN, NS, CC, and RS) the available license exceptions, and list of items controlled.

To determine the export and reexport license requirements for most items on the CCL, you must identify the reasons for control in the relevant ECCN and consult the Commerce Country Chart in Supp. No. 1 to Part 738 to see whether the applicable reasons for control are checked for the specific country. If so, then a license is required unless a license exception applies. Whether a license exception is available will depend on the ECCN and the Country Groups in Supplement No. 1 to Pt. 740.

Unlike the ITAR, the EAR does not require registration of exporters (so no registration fee), and there are no fees to apply for licenses through the SNAP-R. In addition, unlike the ITAR, the EAR does not include a concept of “defense services,” so there is no registration or licensing for the provision of defense services like there is under the ITAR.

The process for establishing a SNAP-R account is relatively easy, and no digital signature certificate is required. Further, unlike the ITAR, which contains several license forms depending on the transaction, the EAR prescribes one single form for each type of export (permanent, retransfer, reexport).

Covering Items Subject to the EAR on DDTC Licenses

With the rewrite of Categories I, II, and III, DDTC will add a “Paragraph (x)” to each of the revised categories. This paragraph has been added to all other USML Categories as they have gone through the rewrite process, and allows for the export of items subject to the EAR under ITAR licenses so long as the conditions of paragraph (x) are met (see ITAR §§ 120.5(b) and 126.6(c)). These conditions include:

(1) An ITAR license may only include items subject to the EAR that are for use in or with the listed defense articles;

(2) The purchase documentation must specify both the defense articles with the items subject to the EAR (no separate purchase orders breaking out the defense articles from the EAR items);

(3) The exporter must ship the EAR items together with the ITAR articles; and

(4) Items subject to the EAR that are included on an ITAR license do not lose their jurisdictional status as EAR-controlled items and remain subject to the EAR for any subsequent transactions.

In light of the last requirement, it is incumbent on the U.S. exporter to properly educate its customers and end-users when using an ITAR license for both defense articles and EAR items to be used in or with the defense articles. In the event the end-user need reexport approval, the approval must come from BIS for items subject to the EAR, not DDTC.

Below is a reference chart comparing some aspects of the EAR to the ITAR.

Yes, but not as broad as ITAR; EAR controls only transmission
of technology, so no EAR concept of defense service

This overview of the EAR is the first installment of a four-part series on the proposed rules to transition firearms and ammunition from the USML to the CCL. Our next alert will examine the transition of certain firearms and their parts, components, accessories and attachments from USML Cat. I items to the CCL. Please stay tuned.